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Fitch assigns SOCAR’s USD notes ’BBB-’ rating

27 January 2012 15:41 (UTC +04:00)

The final rating is contingent upon the receipt of final documentation conforming materially to information already received and details regarding the amount, coupon rate and maturity. The proceeds from the notes issuance are expected to be partially used to fund the company’s capex and other general corporate purposes.

SOCAR plans to issue the notes at the corporate level. Although the notes do not benefit from any direct upstream guarantees from SOCAR’s operating subsidiaries, the prospectus includes covenants limiting corporate reorganisation, negative pledges and put options upon any change of status. In addition, SOCAR owns 100% of all main cash generating subsidiaries. The notes will also have the benefit of a cross default clause.

Although almost half of the group’s debt as of year end 2011 resides at the subsidiaries’ level, Fitch does not presently consider senior unsecured creditors at the group level to be structurally subordinated given the low amount of earnings from subsidiaries (2% of group EBIT in H111). For example, the main debt holder among subsidiaries is SOCAR-Turcas (about 29% of total outstanding debt at end-2011) that generated only 4% of total EBIT in H111.

Additionally, Fitch does not foresee strong asset recovery prospects for subsidiary debt holders in Azerbaijan and does not anticipate asset recovery at subsidiaries abroad to be large enough to encumber other senior unsecured creditors in a liquidation scenario.

Fitch has therefore assigned the notes’ expected senior unsecured rating in line with SOCAR’s IDR. Fitch may reassess its approach to the notes’ rating if the current composition of operating profit and debt change in a way that prioritizes subsidiary debt holders over senior unsecured creditors at the group level.

SOCAR’s ratings incorporate state support as SOCAR is wholly state-owned, represents the state’s interests in the strategically important oil and gas industry, and continues to receive equity injections from the state (AZN190m in 2011), in accordance with Fitch’s parent and subsidiary rating linkage methodology.